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How capitalist profiteers created an energy crisis:

A rogues gallery

by Mark, Detroit
(from Communist Voice #27, September 2001)

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:Subheads:
Who pushed for deregulation and why?
How to create an energy shortage for fun and profit
Natural gas suppliers
How power generating companies profit from higher natural gas prices
Phony power shortages, rising prices, rolling blackouts
Environmental regulations waived
Utilities claim poverty while parent companies siphon-off profits
Utilities blame the deregulation laws they championed
How the utilities blocked additional energy capacity
FERC: energy industry tool
Oil monopolists profit by reducing refining capacity
More competition or more unregulated private cartels?
Bank-directed state bailouts and the PG&E bankruptcy
The balance sheet of profits

Text:

. Deregulation in California was an opportunity for the capitalists to show what they could do about energy once they were free from much government interference. A fiasco ensued. Nevertheless, the capitalists did provide us with one service. They demonstrated just what a cesspool the capitalist market really is. They proved that the neo-liberal doctrine of free profiteering leading to the greatest good for all is a farce. They demonstrated that the market today is dominated by high-powered swindlers and financial manipulators who would undertake any dirty method to fatten their profits. They have also provided a terrific example of how the government officials, whether Republican or Democrat, do their bidding. So let's look in some detail at how the capitalist rogue's gallery created and profited from the California energy crisis.

WHO PUSHED FOR DEREGULATION AND WHY?

. Deregulation has caused havoc not because it was done wrongly, but because it was brought into being by several powerful sections of capitalist bloodsuckers. The charge was led by big non-energy industrialists, a host of private companies involved in producing and transporting energy, companies who saw opportunities to become energy brokers in a deregulated market, and, last but not least, the giant investor-owned utilities. Most other sections of the bourgeoisie cheered this on, or at least quietly went along.

. Major industrial corporations in California (and other states) pushed for deregulation because they thought the new private competitors of the regulated utilities would offer them a better deal. Under deregulation, the private electrical companies entering the market were not required to provide electricity to the general population as the utilities were, but could pick and chose their customers. These new private producers concentrated on supplying major corporations as this would bring higher rates of profit then the much more costly process of supplying millions of individual households. In return for the relatively cheaper costs of supplying a relatively few capitalists, the big industrial and consumer users expected discounted rates. As far as they were concerned, it didn't matter if the good deals they expected would be at the price of destroying the relative stability of the old regulated system and leaving the masses at the mercy of the unregulated energy sharks.

. It's not only the new private energy producers who offered special deals to the capitalists, however. Utilities like Southern California Edison offered bargain contracts to commercial and industrial customers. The rationale behind these special rates was that the utility would be allowed to interrupt power if need be, but the utilities quietly assured the wealthy companies there would be no power interruptions. Adding insult to injury, the utilities pretended these "interruptible" contracts were really as good as adding new capacity, thus lowering the reserve capacity of electricity available for peak use.

. In pushing electricity deregulation, the large industrial and commercial capitalists wanted to duplicate the pattern seen in the deregulation of natural gas which began a decade ago. Natural gas is used both for home heating and cooking and is the fuel powering electrical generating plants supplying about 31% of California's electricity. Deregulation of natural gas led to an enormous increase between the "wellhead" wholesale price and the price paid by residential users. But while homeowners saw the wholesale-retail gap rise from 44% in 1984 to 181% in 1999, for industrial customers the gap in 1984 was only 28% and rose only to 42% by 1999. So industrial users had a lower markup to start with, and because they have a special deal with the natural gas suppliers, they have seen a much smaller increase in the gap between wholesale and retail prices than ordinary customers. In effect, the residential users of natural gas have subsidized the capitalist users under deregulation. (1)

. In California, industrialists also used the deregulation of natural gas to escape from regulations requiring them to pay for storage of reserve supplies of natural gas that in past years insured that adequate supplies were at hand. They also shed regulations requiring them to have some back-up alternative fuel capacity in lieu of natural gas supplies. Instead, the industrial and commercial companies sought to cut costs by keeping reserves low and relying on short-term purchases. With the reserves in the gas storage fields in 2000 dwindling to about a tenth of what they were the year before, the amount stored could not cover the increased winter demand. Thus, the situation was primed for the gas suppliers to take advantage and raise natural gas prices through the roof.

. Private energy suppliers and traders also clamored for deregulation. For them, it held the promise of a potential vast new field for profits. The size of the potential new market for private firms can be seen from the fact that in 1996, retail sales for the utility industry nation-wide were $212 billion and there was an additional $47 billion in wholesale sales. (2) Not only that, electricity is such a vital commodity that in private hands it presents a wonderful opportunity for price-gouging. So private energy producers have lobbied long and hard to gain access to this new source of riches for themselves. For example, the giant Enron company has for this purpose used its close ties to the Bush family. The capitalist journal Business Week notes "Enron was the younger Bush's leading patron in Austin, donating more than $550,000 to the governor . .  . ", and chronicles its role as a big fund raiser for George W. 's presidential campaign. (3) Reliant Energy and Dynergy, two Texas-based firms, and several other energy firms have also made large donations to Bush and the Republicans. But don't think the Democrats have been left out in the cold. To cover all bases during the 2000 election, Enron also contributed over half a million dollars in "soft money" to the Democratic Party.

. Over the years the money and influence of the energy companies paid off with favorable new laws and rulings for the industry. Papa Bush's "Energy Policy Act of 1992" facilitated the entry of private energy firms into the wholesale market by freeing them from regulations that utilities had been subject to and allowing them access to transmission lines owned by utilities for this purpose. Under the Clinton administration, FERC (Federal Energy Regulatory Commission) ordered utilities to organize their transmission and generating capacity into separate entities (though they weren't required to divest any assets) and to apply the same terms for transmission of wholesale electricity by other generators as they applied to the utilities' own generating plants. (4) Thus, the energy companies truly got the best energy policy their money could buy!

. As for the California utility companies themselves, they have cried long and loud about how they are the victims in the new, unregulated market. But it was the very same utilities, like PG&E and SCE, who, after some initial qualms, had the most direct hand in crafting deregulation regulation. Indeed it was then SCE lobbyist David Takashima (now with PG&E) who was sent to Democratic state senator Steve Peace, then chair of the California Senate Energy Committee, to help write the 1996 deregulation law.

. Before deregulation the utilities were allowed to pass on to consumers all of their production costs plus an automatic profit. That was a good deal for the utilities' management and investors, but they saw deregulation as a chance to make even greater profits. A utility executive confessed that they lobbied for deregulation because it would "get rid of the cap on our profits. "(5) True, deregulation legislation included temporary price caps. But the caps themselves were set high, and after the caps, the utilities knew they could raise prices to their hearts' content. Deregulation encouraged the sale of many of the utilities' power plants to private, unregulated companies. The utilities speculated (wrongly) that natural gas prices fueling private generators would remain low and that they could buy energy on the market cheaper than producing all of it themselves. Finally, while deregulation allowed competition in retail sales, the utilities were able to extract massive "stranded costs" bailouts of $28 billion largely for costs incurred in building expensive nuclear plants. These billions were to be paid through a hefty new item on utility bills called the "Competitive Transition Charge. " This charge was to be paid not only by customers who remained with the utilities, but also those who chose to leave for one of the new companies that was supposed to provide competition, thus making leaving the utility less attractive.

. While the private energy companies, the utilities and certain big industrial and commercial companies spearheaded the deregulation drive, the disruption of energy supplies and rising energy costs disrupted wide sections of capitalist business. Nevertheless, the bourgeoisie shows no signs of changing course. The energy interests carry great weight, and the private energy industry has their mouthpiece, the Bush-Cheney administration, to do their bidding. But that's not all. Many capitalists for whom energy deregulation hasn't worked out as they wanted, still have hopes it will eventually help them. Moreover, the bourgeoisie as a whole sees its future in deregulation and privatization. To question the free-market feeding frenzy of their capitalist cohorts in the energy field starts to call into question their own efforts to jettison regulation and dismantle the public sector. Eventually some fissures may develop, but for now neo-liberalism is the banner of the bourgeoisie, and it deflects criticism from deregulation itself by scapegoating environmental activists, minor flaws in deregulation, etc.

HOW TO CREATE AN ENERGY SHORTAGE FOR FUN AND PROFIT

. With no motive higher than gorging themselves on profits, it is no surprise that each sector of the energy capitalists used every means at its disposal, including creating phony energy shortages resulting in blackouts, in order to take full advantage of the new system they had brought into being. Here we will give a glimpse of how each sector of the deregulated energy industry used the system to their advantage.

Natural gas suppliers

. Let's first look at the companies that produce and control the pipeline capacity of natural gas, on which almost a third of California's electrical generating capacity depended. As explained earlier, the demands of big industrialists to cheapen their storage costs had depleted the state's normal reserve supply of natural gas. Meanwhile, the unregulated electricity generators, unlike the utilities, had no obligation to stockpile gas either. In California, there has never been sufficient pipeline capacity to supply enough gas during high demand periods which is why, prior to regulation, storage of sufficient future supplies was mandatory. Commentators on the energy crisis have pointed to lack of sufficient pipeline capacity as a cause of the crisis. Some have justly attacked the capitalists for failure to invest in needed infrastructure. But some apologists of deregulation cite the shortages of pipeline capacity to hide the fact that even without more pipeline capacity, California had previously had a system in place to insure proper supplies before deregulation destroyed it.

. Then, in the spring of 2000, FERC removed price-caps on short-term sales of natural gas. Seeing the electricity generators short on supply in the summer of 2000, the gas suppliers could smell blood in the water and prices began to rise. To make matters worse, El Paso Natural Gas, which transports natural gas via a pipeline from Texas to California, sold a good amount of its pipeline space that could have been used for the California market to a subsidiary it had recently created. By early fall prices were already much higher in California than in other parts of the country. As winter approached, with its increased demand for gas, natural gas prices took off to unheard of levels, largely due to the high prices El Paso Natural Gas charged thanks to the scarcity of pipeline capacity it had created. There was also an explosion that damaged the pipeline, further reducing its capacity. But the company took its sweet time repairing it. The line took five months to repair. Natural gas which typically sold for 25 to 50 cents per million BTUs moved as high as 60 dollars and more. (6) Prices were so high that a number of industrial customers were forced to close down their operations, and residential consumers were also paying through the nose. With no reserves, these "spot market" prices became the norm. Though prices leveled off that same winter, they remained much higher than national prices.

. Various energy industry sources and their apologists have tried to portray these shortages of natural gas as simply a drying up of resources, or, at least, a reflection of the increasing difficulty and expense involved in getting to known natural gas reserves. But whether natural gas reserves are drying up in North America or not, whether massive new investments will be required in the future to produce more natural gas or not, these things are not the cause of the shortages of natural gas in California. There was gas to be had; there had been a system to insure proper supplies before deregulation; and the manipulations of pipeline capacity insured that shortages and soaring prices would be the order of the day.

How power generating companies profit from higher natural gas prices

. Naturally, soaring natural gas prices contributed to higher wholesale electricity prices. After all, the power generators running on natural gas were not about to absorb the costs for the benefit of their customers. FERC and California's ISO (Independent System Operator) supposedly had a price cap of $25 per million BTUs that the power generators could pass on. But when the unregulated power companies complained that they couldn't produce electricity unless they were allowed to pass on rates higher than the cap, the ISO caved in to them. Indeed, it turns out that the power generating companies managed to use the higher costs they were paying for natural gas to increase their own profits. The power companies purchase natural gas both on longer-term contracts and on the day-to-day "spot market" where prices reached astronomical heights. But they charge their customers as if all their gas was brought on the higher-cost "spot market".

Phony power shortages, rising prices, rolling blackouts

. The generating companies' most notorious method for jacking up profits was using phony power shortages of their own creation, periodically leading to threatened or actual blackouts, in order to bid up prices and force more emergency "spot-market" purchases by the ISO. However, the power capitalists still claim that these shortages were simply a case of soaring demand outstripping their ability to produce electricity. And the mainstream bourgeois media repeated this lie for months on end. But the facts tell a different story. Industry sources are fond of citing that demand increased by 13-20% in 2000, though ISO data says the figure is more like 4. 75%. In any case, the problem is that this figure is for total consumption of electricity over a period of time, not the maximum amount of electricity used at any one time, i. e. , peak demand. Peak demand only increased 1. 4% in 2000, less than the average annual increase of 2. 02% for the last 10 years. (7) And it's peak demand compared to electricity producing capacity that is the relevant statistic.

. So if there was no sudden dramatic hike in peak demand, how did peak demand compare to the capacity to produce electricity? The California system has the capacity to produce about 55,000 megawatts of electricity, of which the ISO, which is supposed to oversee supply and demand issues, has access to about 45,000. In addition, to these constant resources, during the so-called shortages, there also existed long-term contracts to provide another 4,500 megawatts. In the spring and fall of 2000, prices were zooming into the stratosphere. Yet peak demand has never reached this total capacity. The highest peak use for 2000 was on July 12, and this only reached 45,600 megawatts. Indeed, during this period of huge price hikes, peak demand was less in four of the last six months of 2000 than it was a year earlier.

. Yet, on the plea that demand was outstripping supply, the energy-producing capitalists raised their prices out of sight. By the winter of 2001, overall prices for wholesale electricity had nearly tripled. "Spot-market" prices for wholesale electricity went as high as 3,900% over 1999 prices! As the prices rose, so did the debts incurred by the utilities who purchased the electricity to transmit to the public. The mounting debt dropped the utilities credit rating, and the energy producers tacked on a "risk premium" which helped further inflate the bills charged to the utilities. The prices the energy producers were charging the utilities were so high that it was much more profitable for the private producers to cancel long-term contracts they had signed to directly supply certain customers they had wooed from the utilities and force these customers back to the utilities. Ah, the wonders of competition! Facing difficulties getting paid the enormous sums they demanded, the energy companies threatened blackouts. Actual rolling blackouts began in January 2001 and have occurred sporadically since. The blackouts, like the rising prices, had nothing to do with capacity being unable to keep up with growing demand. Indeed, one of the blackouts occurred when demand was only about two-thirds of capacity.

. But if capacity was not being outstripped by demand, how were the energy producers able to get such high market prices? They simply made sure that enough of their plants were taken off-line to create an artificial shortage. Under the old regulated system, scheduled maintenance of electrical plants was coordinated so that supply would remain adequate. But not only was this not required in the new system, it was beneficial to the private producers to make sure there wasn't adequate supply. The more plants shut down for "repairs", the less energy was marketed through the California Power Exchange and the more marketed through the ISO, which makes extra-costly "spot market" purchases. Whereas ISO purchases were supposed to account for about 5% of the electricity supply, in 2000 it sometimes rose to 30%. Manipulation of the market got to the point that one of the energy producers, AES, shut down a plant it owned in California, then sold "spot-market" energy from an out-of-state facility at ten times the rate of its in-state operation.

. Naturally these bloodsucking corporations deny they intentionally took their plants off-line to drive up prices. But once again, the facts all speak against them. The rate of natural gas plant capacity taken off-line, which had been normally around 5-10%, rose to almost 50%. In April of 2001, nearly a third of all power capacity was off line which was four times the rate in the previous year. The misnamed Reliant companies' generators were down more than anyone's. And plants owned by Reliant, AES, Mirant Corp. , and Duke Energy accounted for over half of the electricity taken off-line due to shutdowns, though they make up only 25% of the state's generating capacity. Meanwhile, some employees of the energy companies have stepped forward to expose how the scam works. According to an article in the San Francisco Chronicle of May 22, operators at the Reliant's Etiwanda plant in San Bernardino County say that they were ordered to decrease or increase output by energy traders who were tracking prices back at corporate headquarters in Houston. The operators also provided details of how the company outfoxed ISO attempts to measure their output, decreasing the output right after these measurements so as to drive up spot prices which are based on the average output for the hour. The same tricks were reported at Dynergy and AES plants. Even California Public Utilities Commission President, Loretta Lynch, referring to the price hikes and off-line facilities, stated that "I would argue that it's no accident. That in fact it's due to the coordinated behavior of a cartel. "(8) Recently the state of California has had investigators interviewing former energy company employees who are testifying about how the energy producers "gamed" the system.

Environmental regulations waived

. While California officials complain about the manipulations of the electricity producers, Governor Davis is helping them out by waiving environmental regulations. Part of the excuse for this is that it's necessary to cut environmental "red tape" to bring new plant capacity quickly on line. This essentially rewards the energy companies for creating a panic about the supply of electricity. The February 9 Sacramento Bee reported that state officials were going to waive smog-control equipment. The Davis administration did not confirm this, but did confirm that they will allow generators to exceed their pollution limits. A plant in the San Francisco Bay Area (Bayview-Hunters Point) that was supposed to be shut down two years ago because it was causing asthma in the neighborhood is still running. Another plant scheduled to be built by the Calpine company near a housing project in nearby Daly City, adjacent to a PG&E cite already causing ground poisoning, was only halted when activists accidentally discovered the plans for it and threatened mass blockades of the construction site.

. Another license to pollute from the state authorities in the name of assuring production involves a system of pollution credits they issued which can then be purchased and traded by companies that want to exceed pollution limits. They were originally issued before deregulation to SCE because SCE claimed it was too expensive for them to add anti-pollution technology to reduce nitrogen oxide emissions which come from burning fossil fuels. This allowed SCE to avoid cleaning up its plants. With deregulation, SCE sold fossil fuel plants to other companies, and the credits traveled with them. As the now-deregulated plants stepped up their production, and with it pollution, the demand for the credits increased, driving up their market price. The cost of the high-priced credits were, of course, passed on in wholesale electricity prices. In fact, the money spent by companies to buy credits, now exceeds what it would cost to equip all the natural gas plants in California with anti-pollution technology. (9)

Utilities claim poverty while parent companies siphon-off profits

. We have seen how the gas suppliers and the unregulated energy-producing capitalists created shortages and forced unbelievable price hikes. But what about the utilities, like PG&E and SCE? They had to purchase the super-expensive energy while at the same time the state regulated the rates they charged their customers. They amassed huge debts and PG&E declared bankruptcy. Surely they were victims, not stinking profiteers like the unregulated energy producers. Wrong!

. As explained earlier, the utilities supported deregulation because they thought they could make a killing even with the rate caps. After all, the caps were set at 50% over the national average and, at the time, it appeared to them that the cost of buying energy would be cheap what with such inputs as natural gas being relatively inexpensive at the time. And through the first years of deregulation, prior to the huge wholesale price increases of 2000, the utilities were raking in the money. And don't forget the $20 billion already pocketed from consumers who had to foot the bill for "stranded costs. " The utilities also were able to pocket some $3. 2 billion when they sold off many of their generating plants at high prices.

. The energy-producing subsidiaries of the utilities' parent companies were also beneficiaries of zooming prices. While selling off much of their fossil fuel-burning facilities to other private companies, the utilities also spun off other of their generating plants as subsidiaries of their parent holding companies. For example, the PG&E utility sold off its hydroelectric plants to U.S. Generating Company of Maryland, which is wholly owned by PG&E's parent company, PG&E Corp. These subsidiaries sold power to the California PX at incredible rates of profit, where it was purchased by the utilities owned by the same holding company. So what the utility lost in paying high prices for this portion of its electrical power purchases, the sister companies under the control of the parent company gained.

. Indeed the parent companies were able to gorge themselves on the funds and assets of the utilities. The PG&E utility accomplished part of this transfer of wealth from the utilities to the parent companies through the giant stock dividends they awarded. And this was at a time when the PG&E utility said it was heading for bankruptcy! Meanwhile in January 2001, federal authorities allowed PG&E to transfer many of its assets to the parent PG&E Corp.

. Between 1997 and 2000, an estimated $4 billion was transferred from PG&E to the parent PG&E Corp. From 1996 and 2000 some $4. 8 billion was funneled from the SCE utility to the parent Edison International. (10) This money has contributed to affiliated companies of the utilities buying some $22 billion worth of out-of-state investments, mainly in the energy field, and also dabbling in telecommunications and other fields the utilities were previously banned from. Estimates of PG&E affiliates' spending shows at least $9 billion in out-of-state investments since 1999, plus $1 billion spent by PG&E Corp. on its own stock buyback. As well, just before declaring bankruptcy, PG&E handed out bonuses to its mangers. Since 1998, SCE-affiliated companies have invested $10 billion outside California, while since deregulation the parent Edison International has spent $2. 35 billion buying back its own stock.

. This August a new scam by the utilities has been revealed. It seems that San Diego Gas and Electric, which is now fully deregulated, justified its fantastic 300% price hikes in the summer of 2000 on the grounds that it was just passing on the higher wholesale costs charged by the private electricity generators. It turns out that some of the power purchased by SDG&E was actually relatively cheap. But instead of using that cheap electricity to lower rates for its customers, the utility resold this power on the open market, purchased it back at the inflated price, and then passed on the full market cost to its customers.

Utilities blame the deregulation laws they championed

. The overall picture then is quite a bit different than the impression created by the "poor-mouthing" of the utilities. Sure, debts have accumulated on their ledgers. But a large part of these debts have gone to fatten the profits of the parent company and its affiliates. To deflect attention away from their own crimes, the defenders of the utilities complain about how they are in dire straits because deregulation legislation forced them to sell energy-producing plants to profit-hungry sharks and because prohibitions on making long-term contracts forced the utilities into expensive "spot-market" purchases. If there was an award for "chutzpah", certainly such utility apologists should win. After all, it was the utilities that wrote the legislation they are crying about. The power-producing affiliates of the utilities were among the ardent price-gougers. Selling off plants and other provisions of deregulation netted the utilities the cash for giant parent-company investments. Indeed, it's clear the utilities saw the "unbundling" of their transmission and producing facilities as freeing them up for higher-profit ventures around the country and internationally. They hardly had to be "forced" into such things. What they are really griping about is that the market contained characters as ruthless or more ruthless than themselves.

. As for prohibitions on long-term contracts, this is a fraud. Even before deregulation, Californian utilities supported short-term purchases of energy as an alternative to spending money on new capacity. As for the deregulation legislation, it did not ban long-term contracts. Rather, the legislation only said that if the utilities made overly-expensive long-term contracts, the state would not bail them out. In fact, the utilities insisted that buying and selling of electricity take place on the PX, which meant buying and selling on a "day-ahead" basis. But the utilities wanted it both ways: deregulation to free them to make greater profits, and government bailouts if some other bloodsuckers got the upper hand on them.

. Of course there are some market fanatics that raise that the utilities should simply have been allowed to pass along all the wholesale cost hikes rather than have any retail price caps. This brilliant idea would have raised the average monthly electricity bill to about $600/month. This would be a wonderful example of how to balance supply and demand in their eyes as demand would undoubtedly fall. Of course, so would the state economy and any politician who agreed to such a proposal. The Republicans and Democrats intend to make the masses bailout the utilities, but in less draconian ways.

How the utilities blocked additional energy capacity

. While we have already shown that there was capacity to cover electricity demand if it weren't for artificially taking plants off-line, it's also true that electricity reserve levels have been dwindling. What's interesting is that while the apologists for the energy industry blabber that the crisis was caused by lack of capacity and that no new plants have been built supposedly because of California's environmental laws, the utilities themselves have for years been killing new plant proposals, and in particular plants that would rely on less-polluting and renewable types of energy. (11) As a Feb. 12, 2001 San Francisco Chronicle article put it:

. "California utilities' long-standing distrust of the renewable energy industry has been a major force discouraging -- and in some cases even blocking--wind, solar and other ventures from expanding enough to ease the grip of the state's current energy crisis. The utilities stance -- along with regulatory actions, market forces and lack of governmental leadership -- have combined in the past two decades to prevent the renewables industry from producing more than 12 percent of state energy supplies. .  .  . "

. The official excuse of the utilities was that it would cost them more to purchase energy from alternative sources. God forbid the profit margin of the utility should fall or that the wealthy capitalists should pay for the transition to less-polluting forms of energy just to stave off environmental ruin! But were it not for deregulation that the utilities pushed, it appears that the state would have compensated the utilities for the extra costs. In fact, in the same San Francisco Chronicle article, PG&E spokesperson John Nelson states: ".  .  . our biggest concern was we might not be paid back given impending deregulation the state had already begun. " In other words, were it not for the utility's desire to get even bigger profits through deregulation, there may have been more and cleaner electricity, provided the state bled the masses some more to compensate the utilities.

. Then again, the utilities have been putting up obstacles to alternative energy sources even before deregulation was on the agenda. The hostility of the utilities toward alternative energy sources is confirmed in the article by former PG&E head of research, Carl Weinberg, who says that his recommendations to include more alternative sources were ignored in part because, "At the time, they were worried about deregulation, and their focus began to go elsewhere. " Meanwhile, by the utilities not incurring a little more cost to provide extra capacity through alternative sources and instead opting for deregulation, we now have energy so expensive that even those alternative sources that were more expensive look incredibly cheap.

FERC: energy industry tool

. While the utilities and private energy companies have been wrecking havoc, what has the Federal Energy Regulatory Commission (FERC) been doing? Supposedly this is the national watchdog agency that is supposed to insure energy supplies at reasonable prices. But in fact, they are complicit in the California crisis, too. Take the question of the California utilities opposition to "green" alternative energy. In 1995 the FERC intervened, at the request of SCE and SDG&E, to cancel the California Public Utilities Commission orders requiring utilities to enter into contracts with producers using renewable and less-polluting fuel-burning plants. This killed 1,500 megawatts of capacity, or enough to power 1. 4 million homes.

. When wholesale energy prices where going out of sight, FERC's main role has been to stonewall any serious measures against the private energy producers. Eventually the FERC energy industry lackeys cited a host of companies for unfair charges and demanded some minor refunds. But what FERC considers unfair omits all but a bit of the outrageous prices. For example in February, FERC cited sales by six companies for exceeding what FERC considered a reasonable threshold of $430/megawatt hour. Compare that to $20-35/megawatt hour prices prior to deregulation based on costs incurred by the plant plus the regulated profit. The FERC threshold is even about double the super-high deregulated prices averages of $211/megawatt hour in Southern California in the first quarter of 2001.

. Presently, the state of California is trying to get back about $9 billion in overcharges for electricity, which is but a small fraction of the price-gouging. But a FERC agency law judge has declared that the overcharges were really only $1 billion and also indicated that amount may be offset by what the judge considers legitimate charges still owed the private energy wholesalers by the utilities and the state. According to this judge, evidently the private energy profiteers should refund nothing to the utilities or the state.

. This July, then-FERC chairman Curtis Hebert, argued against releasing to a congressional investigation the records of a settlement that FERC reached with the parent Williams company over the price manipulations of its AES subsidiary. It seems AES plants were mysteriously shut down for "repairs", forcing the California ISO to purchase energy at other Williams plants for $750/megawatt hour compared to the contracted price with AES of $63/megawatt hour. Williams and AES admitted no wrongdoing, and Williams got a minor fine in the settlement. Clearly FERC's attitude to price-gouging is see no evil, hear no evil, speak no evil. Fearing that such a naked coverup was too much of an exposure of FERC, other FERC commissioners thought at least the documents should be made public.

. In August, chairman Hebert resigned. Bush replaced him with another industry henchman, Patrick Woods. Woods' resumé includes a stint as an engineer for Arco Indonesia and directing energy deregulation in Texas. Meanwhile, Hebert found a cozy job with the energy industry as he now works for Energy Corp.

Oil monopolists profit by reducing refining capacity

. The contrived nature of the electric power shortages and the utilities intentional sabotage of energy-producing capacity is clear. Yet, the energy producers continue to insist that they would never purposely reduce supply. In this light, the June 14 report issued by Senator Ron Wyden, a liberal Democrat from Oregon, shows how another section of the energy monopolies, the giant oil companies, conspired to force down refinery production of oil in order to raise gasoline prices. (12) Wyden's investigations are mainly for grandstanding and little will follow from them except some congressional investigations. Nevertheless, his report is quite revealing as it makes its case on the basis of internal documents of the oil executives themselves. For example, a Texaco document dated March 7, 1996 states:

. "As observed over the last few years and as projected well into the future, the most critical factor facing the refining industry on the West Coast is the surplus refining capacity, and the surplus gasoline production capacity. The same situation exists for the entire U. S. refining industry. Supply significantly exceeds demand year-round. This results in very poor refinery margins, and very poor refinery financial results. Significant events need to occur to assist in reducing supplies and/or increasing the demand for gasoline. "

A November 30, 1995 "Competitor Intelligence Report" from Chevron directly states the industry must curtail production to increase profits:

. "A senior energy analyst at the recent API (American Petroleum Institute) convention warned that if the U. S. petroleum industry doesn't reduce its refining capacity, it will never see any substantial increase in refining margins. "

. The Wyden report then uses internal company documents and depositions of oil company executives taken for a case that reached the California Supreme Court to show how the companies reached agreements with each other to curtail production. In particular they curtailed production of gasoline that had to be reformulated to meet California clean air standards, so-called CARB gasoline. Exxon, ARCO, Chevron, Shell, Texaco, Tosco and Unocal entered into 44 such agreements involving collaboration with at least one of their competitors. Any "independents" who marketed more gas than deemed proper by this cartel were to be crushed for the crime of driving down prices. Thus, an internal Mobil document targets the independent Powerine company for destruction as follows:

. "If Powerine re-starts and gets the small refiner exemption, I believe the CARB market premium will be impacted. Could be as much as 2-3 cpg (cents per gallon) .  .  . The re-start of Powerine, which results in 20-25 TBD (thousand barrels per day) of gasoline supply .  .  . could .  .  . effectively set the CARB premium a couple of cpg lower .  .  . Needless to say, we would all like to see Powerine stay down. Full court press is warranted in this case. "

The Powerine refinery was closed down in 1995. But the case lives. In an odd twist, since the Wyden report was issued, Pat Robertson, the right-wing religious crackpot, has supplemented Wyden's report with complaints involving how the industry giants strong-armed banks into refusing to make loans to Powerine with the threat that the banks would lose their business. It seems Robertson was an investor in Powerine, and so this ultra-conservative has had to expose a bit of the real workings of the lords of capitalism he so dearly loves.

. In addition, the report states that the oil companies have closed 24 refineries since 1995. These days it's common to hear the oil monopolies claim that they aren't curtailing production to drive up prices because demand is outstripping the capacity of their (presently-operating) refineries which are operating at 100% trying to meet demand. But if that's the case, it's only because the companies made sure they could not meet demand. Of course, this doesn't mean that oil companies won't eventually produce more, but only after they extort major price increases. For now, the oil giants are just wallowing in increased profits. The Wyden report documents that though Texaco's production dropped from 1998 to 2000, its net income quadrupled in the same period. Chevron's net income increased 250% in 2000. ExxonMobil Corporation and BP Amoco both saw their net income more than double in 2000.

More competition or more unregulated private cartels?

. Deregulation was supposedly going to bring new competition and thereby lower prices. Obviously there's no lower prices. As for competition, this proved to be a fleeting phenomenon. For example, the powerful Enron corporation quit the California residential market in 1998. Deregulation was also supposed to provide customers with more "green power" alternatives. Originally 12 smaller "green" firms came into the California retail market, but by the winter of 2000-2001, not one was left. At their peak, new retail competitors garnered a mere 5% of the customer base. The only place where retail competitors created a niche for themselves was among certain businesses where the economies of scale made supplying them more profitable.

. Indeed, it appears that some of the retail competitors really only had an eye on lucrative contracts with big industrial and commercial firms and weren't all that interested in trying to make a go of it among ordinary consumers. For example, in explaining why companies like Enron don't go after residential customers, a former analyst for the Michigan Public Services Commission, Geoffrey C. Crandall, explained that

"Marketers pursue their most lucrative customers first. Thus, to the extent that competition at the generation level exists, the alternative suppliers tend to market their services to larger industrial and commercial customers. The transaction costs to market to and develop contracts with individual customers are much higher for the residential sector. As a result, marketers pay little attention to the residential sector, and especially the low-income customers. "(13)

At the same time, those who wanted to compete were facing a daunting task. On top of the fact that they had to go up against the huge resources of the utilities, deregulation law insured that their customers would have to also pay for "stranded costs" incurred by the utilities who had enjoyed a market monopoly. So retail competition has remained a myth, at least for residential customers.

. As far as competition at the wholesale level, the old regulated monopoly control of electrical generation has been busted. But what has taken its place? There are about 11 companies selling power to the PX. However, they are already operating as a cartel to "game" the system. Moreover, while the number of companies generating power in California has increased, the spread of deregulation around the country means that these same companies are not merely players in the California market, but are consolidating their grip on much of the national energy market. In place of a few government-regulated monopolies in each state, we are heading toward a system with a few electricity-producing and trading corporation giants with control of large chunks of the national power system. We have previously chronicled how the utilities themselves used deregulation to buy assets all over the country, and the companies that have come to California under deregulation are spreading their tentacles across the country and around the world. For instance, El Paso Energy, parent of the El Paso natural gas, moves one-quarter of all natural gas in the U. S. Overall then, state-wide monopolies that were regulated, have been replaced by national and international monopolies that are unregulated.

. That deregulation facilitated a new monopolization process confirms the Marxist view that competition inevitably gives rise to monopoly. It's the same process that has led to the modern imperialist system where a relative handful of huge conglomerates divide up the domestic and world markets among themselves. Monopoly in turn leads to competition, but not a return to the early days of capitalist competition when small firms still dominated, but on the basis of giant corporations jockeying for world dominance. This process is inherent in capitalism. This is one reason that the idea that, if only there really was competition deregulation would be wonderful, is a fantasy. The task for the workers is not to find the proper formula for deregulation that will allegedly lead to real competition. Instead the problem to be solved is finding ways for the masses to develop their collective might to fight deregulation, and to build a movement against capitalism itself.

Bank-directed state bailouts and the PG&E bankruptcy

. As detailed earlier, the companies spun-off by the utilities and the utilities' parent companies have made a fortune off of deregulation. The utilities were essentially drained for the profits of the parent companies. Meanwhile, the now debt-ridden utilities wanted the masses to bail them out of their difficulties. Never mind that according to some estimates, about half of the $12 billion they then declared as their debt was owed to companies they were affiliated with!

. The state made many efforts to satisfy the utilities and the power generators, who were by then using blackouts to extort a bailout. The state granted a couple of major rate hikes and purchased power by emptying the state treasury. Directing the bailout process were the top financiers. Credit Suisse First Boston, which finances some of the power-generating companies with operations in California, had been encouraging investment in these companies by assuring investors that the blackouts would "soften up the Legislature and the voters to the need for a rate increase. "(14) Meanwhile, the Democratic speaker of the State Assembly actually retained Credit Suisse First Boston personnel to write up new bailout legislation which was eventually passed by the legislature. The bailout provided the utilities with $10 billion to pay off their debts through state-issued bonds and another $5 billion for the state to directly buy electricity on the market.

. Credit Suisse First Boston wasn't the only bank with a stake in this issue. Former Clinton Treasury Secretary Robert Rubin, in his present capacity as head of Citigroup, decided to pay a visit to Governor Davis. Why? Salomon Smith Barney, which is owned by Citigroup, happens to be a banker for the parent companies of the state's two biggest utilities, Edison International and PG&E Corp. Not to be left out, Goldman-Sachs, which just happens to have ties to PG&E, also met with state officials. According to the LA Times of February 17, 2001, there was no doubt as to why all this hobnobbing between bankers and state politicians was going on. They wrote "To guarantee that those monthly bills are big enough to cover the bonds, which is essential if Wall Street is to bless the plan, rate increases could soon be necessary. " Not only were the bankers interested in wringing money from the masses to help their clients, they were also interested in the lucrative job of marketing the state bonds floated to pay for electricity. The state treasurer recruited J. P. Morgan Securities to head up a team of 26 financial firms to market the bonds. J. P. Morgan Chase, along with Bank of America, have a reported half a billion in loans outstanding to the California utilities.

. In the end, PG&E decided that the bailouts weren't good enough, and they declared bankruptcy. The immediate issue was that, instead of only using state funds to bailout the utilities, the state attempted to siphon off the proceeds of one major state-granted utility rate increase to finance the state's own power purchases. As well, there was the threat the power-generators would go to court against PG&E. So PG&E struck first. The parent corporation, PG&E Corp. , had the financial ability to save the struggling utility, but they had found more money could be made elsewhere and just weren't interested. Indeed, according to a Sweat Magazine article of April 16, 2001, by law professor Stephen F. Diamond of Santa Clara University, PG&E Corp. had contingency plans to exit from the California utility business since the summer of 2000. It hired a well-known bankruptcy firm to fight takeovers and protect its profitable out-of-state assets. Then PG&E Corp. used these assets to secure a billion-dollar loan from General Electric Capital and Lehman Brothers. But nothing from this loan was used to assist its California utility. Instead parent-company creditors were paid off and shareholders were given another dividend. Wall Street insiders knew that the company was preparing to declare bankruptcy and the parent company was putting its efforts toward expanding and protecting its other assets. In fact Diamond reports that some Wall Street hotshots hired a team of industry experts to help them make a killing by "selling short" PG&E stock, betting the share price would plummet, as it did.

. By declaring bankruptcy, the PG&E utility staves off having to pay its creditors and helps insure that its assets are protected. The state government was contemplating the purchase of the transmission lines of PG&E, but now that the fate of the utility's reorganization is in the hands of the bankruptcy court, the attempts of the state to intervene in PG&E are put on hold. What the outcome of the bankruptcy proceedings will be no one knows, but Diamond notes that first say on the matter will now go to the power-generators who are owed by PG&E. He speculates that PG&E may use the reorganization procedure not to start up the utility again, but to abandon it as the creditors fight over its remains.

. So the utility may collapse; the energy companies who initiated the crisis will get what's left; Wall St. insiders will make out like bandits; and ordinary shareholders, including the company's unionized workers whose retirement funds account for 10% of the PG&E common stock, will be out of luck as share prices crash. And the PG&E Corp. executives? They will go on their merry profit-making way, having built their other assets up from utility company profits.

. While PG&E chose the bankruptcy route, Southern California Edison has extracted a bailout plan from the Governor Davis to its liking. The plan, which has yet to go through the legislature, would wind up costing each ratepayer a total of $2,000 on average. Besides new utility charges totaling around $5-7 billion, Davis' proposal shields SCE's parent company from responsibility for the present or future problems of their utility, reduces the regulations on the utility, and provides for a overpriced state buyout of SCE's transmission lines.

The balance sheet of profits

. Now that we have seen how the energy capitalists have robbed the masses, it's time to total up the results. Naturally, not all the profits of the energy companies came out of California, but their California tactics are indicative of how they generally fatten their bottom lines. While the Dow Jones Industrial Average fell nearly 5% in 2000, power companies had nearly a 60% return to investors. The top 10 sellers and marketers of electricity in California averaged an increase of 54% in profits. Here's how some power companies did individually.

. Dynergy: Its profits were up 210% in 2000 thank in part to its co-ownership of three large plants in California. With these profits it was able to spend $4 billion to purchase Illinova, the holding company which owns Illinois Light and Power.

. Duke Energy: Its wholesale energy profits rose 374%

. El Paso Energy Corp. : It purchased 11 small power plants in California from Dynergy and still posted record net income of $652 million in 2000.

. Enron: Its net income was up 32% in 2000, and between 1997 and 2000 it moved from #94 to #18 on the Fortune 500 companies list.

. Reliant: Its profits were up 55% in 2000, and its generating and trading division was up 600%.

. Calpine: Its profits were up 240%.

. AES: Its profits rose 181% though its California operations lost $11 million. Their California loses were due to having signed contracts to have their power marketed before prices took off. AES out-of-state plants did ring up outrageous profits selling power in California.

. Public Service of New Mexico: This investor-owned utility which sold to the California market saw its revenues double on sales volume increases of only 11%.

. Los Angeles Department of Water and Power: This municipally-owned power company, the nation's largest public utility, made $240 million in 18 months selling its surplus energy to the California Power grid.

. The utilities PG&E and SCE: Despite recent indebtedness, together they raked in about $20 billion so far in "stranded costs" and together have funneled about $9 billion to their parent firms in the three to four years up through 2000.

. The deregulated capitalists may not have been able to provide for stable energy supplies or cheaper prices. They may have paved the way for more destruction of the environment. But they were creative geniuses in lining their own pockets. This should come as no surprise, for in reality, deregulation had no other purpose than this. <>

Notes:

(1) Statistics are from a January 2001 article by Wenonah Hauter and Tyson Slocum for the organization Public Citizen called "It's greed stupid! Debunking the ten myths of utility deregulation. " (Return to text)

(2) Congressional Research Service Issue Brief entitled "Electric utility restructuring: overview of basic policy questions" by Larry B. Parker, Jan. 7, 1999. (Text)

(3) February 12, 2001. (Text)

(4) FERC does not have jurisdiction over deregulating retail sales, and the state governments like California took the initiative here. (Text)

(5) SF Bay Area Guardian, Feb. 14, 2001, p. 17. (Text)

(6) "How we got into the California energy crisis" by William Marcus and Jan Hamrin. (Text)

(7) Statistics are from a March 19, 2001 report by the Foundation For Taxpayer and Consumer Rights (FTCR) entitled "Special report: the manufactured energy crisis", available at< www. consumerwatch. org. >. (Text)

(8) AP, May 16, 2001. (Text)

(9) Marcus and Hamrin. (Text)

(10) FTCR report of March 3, 2001. (Text)

(11) As for the charge that no new plants have been built in California in the last 10 years because of environmental restrictions, that's not quite true. Nine smaller plants were built in the 1990s before deregulation, and since April 1999 nine larger plants have been approved and six are under construction, with some scheduled to come on line by the end of this year. If Bush and Davis are slashing environmental regulations nevertheless, this just shows they created a panic to serve their big business masters. (Text)

(12) Available at < http://wyden. senate. gov/oilinvest. doc >. (Text)

(13) Quoted in the Detroit weekly MetroTimes, (March 28-April 3, 2001) article by Curt Guyette entitled "Future shock? California sparks doubts about Michigan's energy future". (Text)

(14) FTCR's Special Report of March 19 ­ see footnote 7. (Text)


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